The unknown unknowns

Venky Vembu | Updated on June 19, 2020

Formula none: The illusion of confidence can lead to shocking outcomes. Last week, Sweden acknowledged that its “Covid strategy” — which included soft lockdown norms — had failed   -  REUTERS/COLM FULTON

The same set of data can lead experts to different conclusions about a shrinking economy and governments to flawed social welfare measures

In a long-ago time, when the world was not quite facing such an existential crisis as it is today, two organisational behaviour scientists conducted a curious social science experiment. Their research topic may have a contemporaneous ring to it, particularly in the context of the #BlackLivesMatter (BLM) protests, but it also reflects a nostalgia-inducing sport-and-pastime normalcy that seems completely out of sync in a world in the grip of a virulent pandemic.

As part of that experiment, 29 teams of researchers were given the same set of soccer games data to analyse, and asked to address a question based on it: Are soccer referees more likely to give punitive ‘red cards’ to players with dark skin than to players with light skin?

The answers from the 29 teams were revelatory. They showed that any single analyst team’s results were strongly influenced by subjective choices during their analysis of the data. The researchers concluded: “Had any one of these 29 analyses come out as a single peer-reviewed publication, the conclusion could have ranged from ‘no race bias’ in referee decisions to ‘a huge bias’.”

In other words, even seasoned researchers may look clinically at the same set of data, and — as with the story of the blind men and the elephant — arrive at vastly differing conclusions.

Much the same can arguably be said of economists’ projections of how bad the Indian economy will fare in the current fiscal year. Everyone agrees that this could perhaps be one of the worst years in India’s economic history. However, their estimates of just how bad it could get vary widely — to the point where they are not even in the same ballpark.

A preponderance of opinions is clustered around the view that the economy will likely shrink by about 5 per cent this year. One extremely bearish assessment from a former chief statistician sees a more pronounced collapse, to about (minus) 12.5 per cent! On the other hand, a former RBI governor (who also served on the Prime Minister’s Economic Advisory Council) reckons that, subject to certain conditions, the full-year GDP growth could even end up positive, even if it is only 1 or 2 per cent.

This is emblematic of the problems that policymakers face in responding to the Covid-19-induced economic crisis. Each of these is an economist of eminence, but, looking at largely the same set of data, their forward-looking estimates of the impact are all over the place.

And that’s not even counting the other economy-disrupting balls in the air — the “unknown unknowns”, in the immortal words of former US sectretary of defence Donald Rumsfeld. Earlier this week, Indian and Chinese troops clashed bloodily in the Ladakh frontier. The prospects of a heightening of the conflict are decidedly grim.

Other geographies around the world, too, are similarly in political and social ferment. US cities have been overrun by BLM protests. Tensions are flaring up across East Asia, as China flexes its regional muscle. Meanwhile, the Covid-19 virus is still slipping like silent death across borders: India may not have run through its first wave of infections, but symptoms of a second wave are already showing in China and other countries. The economic consequences of all these “balls in the air” haven’t even been factored into the forecasts.

Economist Frank Hyneman Knight famously expanded on the distinction between “risk” and “uncertainty”: The former is “measurable”, the latter not. In his 1921 book Risk, Uncertainty and Profit, he wrote: “The ordinary decisions of life are made on the basis of ‘estimates’ of a crude and superficial character. In general the future situation in relation to which we act depends upon the behavior of an indefinitely large number of objects, and is influenced by so many factors that no real effort is made to take account of them all, much less to estimate and summate their separate significances.”

More pointedly, he noted: “It probably occasions surprise to most persons the first time they seriously consider what a small portion of our conduct makes any pretense to a foundation in accurate and exhaustive knowledge of the things we are dealing with.”

These uncertainties confound us even at an individual level. While planning our finances — say, saving for retirement — we are called upon to make estimations of how long we expect to live or what the rate of inflation will be some 20 years down the line. These are considerations that confound actuarial scientists and full-fledged economists, even the most eminent of whom cannot agree on next year’s growth estimates.

All this is not to suggest that policy action is about shooting in the dark. But as economists John Kay and Mervyn King note in their 2020 book Radical Uncertainty: Decision-making for an unknowable future, the notion that governments can precisely calculate what maximises social welfare is flawed, since the consequences of policies and actions are far too uncertain. Instead, they note, real governments make decisions incrementally, trying to find outcomes that are better and avoiding outcomes that are worse. Certitude is something of a luxury — except, perhaps, for those who are under the influence of an illusion of confidence. The experience of Sweden, which acknowledged last week that its “Covid strategy” had failed spectacularly, offers a sobering confirmation of that.


Venky Vembu is Associate Editor, BusinessLine;


Published on June 19, 2020

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